[This post by Derik Andreoli, Senior Analyst at Mercator International LLC, is republished with permission from The Oil Drum.]

In 2009, U.S. oil production began to climb after declining for 22 of the previous 23 years.

The shale oil production of the Bakken formation, which straddles the Montana-North Dakota border and stretches into Canada, has been a significant contributor to this temporary uptick in oil production.

The Bakken boom has inspired a number of prominent commentators to resurrect the energy independence meme. Daniel Yergin was first at bat, asserting in an essay published by The Wall Street Journal that rising prices and emerging technologies (especially hydraulic fracturing) will significantly drive up world liquid fuels production over the coming decade(s). Ultimately, Mr. Yergin argues that tight supplies lead to high fuel prices, and high fuel prices will bring previously inaccessible oil to the market. The trouble with this line of thinking is that high prices aren’t merely a symptom of the supply problem; high prices are the problem.

After Mr. Yergin stole first base through this apparently convincing display of contortionist logic, the next up to bat was Ed Crooks who recently penned an analysis piece for the Financial Times. In this piece, Mr. Crooks declares that “the growth in U.S. and Canadian production from new sources, coupled with curbs on demand as a result of more efficient use of fuel, is creating a realistic possibility that North America will be able to declare oil independence.”

Mr. Crooks thus ‘balances’ rising production from shale oil and Canadian tar sands against declining consumption, which he mistakenly chalks up to efficiency gains rather than the deleterious effects of the greatest recession since the Great Depression. Beyond this obvious blunder, Mr. Crooks manages an even greater and far more common gaffe by neglecting to integrate decline rates of mature fields into his analysis.

But in a game where the media is the referee and the public doesn’t know the rules, Mr. Crooks manages to get on base by knocking a foul ball into the bleachers. With Yergin on second and Crooks on first, Edward Luce steps up to plate and takes a swat at the energy independence meme, directing the ‘greens’ to look away as “America is entering a new age of plenty”. And while the greens looked away, Mr. Luce took a cheap shot at clean energy through an attack on the federal government’s support for the now bankrupt solar panel manufacturer, Solyndra. Luce thus willingly employs the logical fallacy of hasty generalization to sway his audience. Of course the Solyndra bankruptcy is no more generalizable to the solar energy industry than BP’s Macondo oil spill is to all offshore oil production, but in a game of marketing one-upmanship one should not expect a balanced and rigorous evaluation of the possibilities.

With the bases loaded and oil prices remaining stubbornly high as tensions in the Middle East and North Africa persist, the crowd is getting anxious. And the crowd should be anxious. After all, tight supplies and rising oil prices strain personal finances and threaten to send our fragile economy back into recession. It is, therefore, unsurprising that the public is as eager to consume the myth of everlasting abundance, as they are eager to consume these scarce resources.

While the Bakken boom offers a hopeful story in which American ingenuity and nature’s endless bounty emancipate us from energy oppression and dependence on evil and oppressive foreign dictators, musings of energy independence are premature, misguided, and misleading. The problem with the Bakken story as told by Crooks and others is that it lacks historical context. Referring to recent developments as an energy revolution implies that there are no lessons to be learned from history. But as Mark Twain put it, “history doesn’t repeat itself, but it does rhyme.”

IT may seem strange in an era of cyberwarfare and drone attacks, but the newest front in the rivalry between the United States and China is a tropical sea, where the drive to tap rich offshore oil and gas reserves has set off a conflict akin to the gunboat diplomacy of the 19th century.

The Obama administration first waded into the treacherous waters of the South China Sea last year when Secretary of State Hillary Rodham Clinton declared, at a tense meeting of Asian countries in Hanoi, that the United States would join Vietnam, the Philippines and other countries in resisting Beijing’s efforts to dominate the sea. China, predictably, was enraged by what it viewed as American meddling.

For all its echoes of the 1800s, not to mention the cold war, the showdown in the South China Sea augurs a new type of maritime conflict — one that is playing out from the Mediterranean Sea to the Arctic Ocean, where fuel-hungry economic powers, newly accessible undersea energy riches and even changes in the earth’s climate are conspiring to create a 21st-century contest for the seas.

China is not alone in its maritime ambitions. Turkey has clashed with Cyprus and stoked tensions with Greece and Israel over natural-gas fields that lie under the eastern Mediterranean. Several powers, including Russia, Canada and the United States, are eagerly circling the Arctic, where melting polar ice is opening up new shipping routes and the tantalizing possibility of vast oil and gas deposits beneath.

“This hunt for resources is going to consume large bodies of water around the world for at least the next couple of decades,” Mrs. Clinton said in a recent interview, describing a global competition that sounds like a watery Great Game.

Such tensions are sure to shadow President Obama this week, as he meets with leaders from China and other Asian countries in Honolulu and on the Indonesian island of Bali. Administration officials said they expected all sides to tamp down disagreements, though that won’t mask the coming conflicts.

“Underlying all of this is the recognition that an increasing share of oil resources is offshore,” said Daniel Yergin, an energy expert and author of a new book, “The Quest: Energy, Security, and the Remaking of the Modern World.” “When you have energy resources on land,” he said, “you know where things stand. When they’re offshore, things can get murkier.”

Twenty-nine million barrels of oil a day, one-third of global production, now come from offshore fields, Mr. Yergin said, a share that will rise steadily. The South China Sea alone is estimated to have 61 billion barrels of petroleum — oil and gas — plus 54 billion yet to be discovered, while the Arctic is projected to have 238 billion barrels, with possibly twice that in undiscovered sources.

As countries race to erect drilling rigs and send oil exploration vessels to comb the seabed, conflicting maritime claims are helping to fuel a naval arms race. It is no coincidence that the countries with the fastest-growing navies are those with stakes in these energy zones.

China expanded from 2 Soviet-era destroyers in 1990 to 13 modern destroyers in 2010, according to the International Institute for Strategic Studies in London. In its drive for a blue-water navy, one that operates in the deep waters of open oceans, it is also building an aircraft carrier. Malaysia and Vietnam are beefing up their navies with frigates and submarines. India, which wants to make sure it has access to the Far East, is bulking up. And the Israeli Navy is pushing for more vessels to counter Turkish warships circling Israeli drilling rigs.

“Countries want to make sure they have the ability to develop resources and to make sure their trading routes are protected,” said David L. Goldwyn, a former special envoy for international energy affairs at the State Department.

This competition is also behind calls for the United States to bolster its naval strength, even at a time of budget cuts. Mitt Romney, considered by many the Republican front-runner in the presidential race, declared recently he would “reverse the hollowing of our Navy and announce an initiative to increase the shipbuilding rate from 9 per year to 15.” With anemic building rates and tighter maintenance budgets, analysts say, the Navy has been forced to cope with an aging fleet that some say is not up to its challenges.

Even so, the Obama administration has been an active practitioner of gunboat diplomacy, a term that refers to achieving foreign-policy objectives through vivid displays of naval might. Last fall, Mr. Obama sent the aircraft carrier George Washington to the Yellow Sea for joint exercises with South Korea, sending a message to both North Korea and its key backer, China. The move echoed the Clinton administration’s decision in 1996 to send the Seventh Fleet to warn China against attacking Taiwan.

The United States has used gunboat diplomacy in Asia at least since 1853, when Commodore Matthew C. Perry sailed his fleet into Tokyo Bay, intimidating Japan into opening up to foreign trade. But these days, the Chinese are fashioning an Asian version of the Monroe Doctrine to press their imperial ambitions.

FOR Mr. Obama, whose roots in Hawaii and Indonesia have imbued him with a strong Pacific worldview, the drawdown in Iraq and Afghanistan gives him a good pretext to turn his gaze eastward. The United States has worked to shore up its ties to old Asian allies, like Japan and South Korea, as well as new giants like India. The goal, though administration officials are loath to say it publicly, is to assemble a coalition to counterbalance China’s growing power.

On a recent tour of Asia, Defense Secretary Leon E. Panetta pledged not to retreat from the region. “If anything,” he said, “we’re going to strengthen our presence in the Pacific.” This week, Mr. Obama is expected to announce an agreement with Australia for a permanent American military presence there.

On land, the race for energy supplies is not new, of course. From the 1950s to the 1970s, the United States maneuvered to keep Russia out of oil-rich Iran. Today, China is busy cutting deals in energy-rich Africa. But technology has changed the equation, putting undersea oil and gas fields into play as never before.

“At root, it’s a question of when and how you will have these conflicts,” said James B. Steinberg, a former deputy secretary of state with experience in all three regions. “Will countries see these as win-win opportunities, or will they see them as zero-sum competitions?”

For China, the South China Sea has long been crucial as a supply route for oil and other raw materials to fuel its economy. China’s claims have deep historical roots, dating from the 1940s, when Chiang Kai-shek’s Nationalists drew a dotted line in the shape of a cow’s tongue extending south of China, embracing most the sea and two disputed island chains, the Paracels and the Spratlys.

Quarrels over these hunks of volcanic rock wouldn’t matter much, except that China, Vietnam and the Philippines are running into one another in the race for oil. Last spring, in two separate incidents, Vietnam accused Chinese vessels of deliberately cutting the seismic survey cables of an oil exploration ship. A former American official said his nightmare scenario would be a Chinese warship’s firing on an Exxon oil-drilling ship.

If the South China Sea is simmering, then the eastern Mediterranean is seething. There, claims to huge natural-gas reserves off the coast of Cyprus and Lebanon have raised tensions with Turkey, which occupies half of Cyprus, as well as with Israel. Cyprus and Israel are drilling for gas, angering Turkey. The militant Islamic group Hezbollah, in Lebanon, has threatened to attack Israeli gas rigs.

Further complicating this is the bitter rift between Turkey and Israel after the deadly Israeli commando interception of a Turkish flotilla trying to transport aid to Palestinians in Gaza last year.

“The Turks are saying, ‘The Israelis humiliated us; what can we do in return?’” said Charles K. Ebinger, a senior fellow at the Brookings Institution. “Part of it is just the greater assertiveness of Turkey’s foreign policy everywhere.”

Perhaps the least dangerous arena of competition lies in the frigid north, partly because experts believe that many of the Arctic’s mineral deposits lie within one or another of the 200-mile exclusive economic zones of the countries that ring the ocean. But even countries with no Arctic coastline, like China and South Korea, are sending icebreakers there to explore weather patterns and fish migration.

Ironically, the biggest bone of contention there is between two stalwart allies, the United States and Canada. Melting ice has opened up the fabled Northwest Passage, which runs through an archipelago of islands in northern Canada. The United States views the passage as an international waterway, giving American ships unlimited access. The Canadian government insists it is an inland waterway, meaning that foreign ships can use it only with Ottawa’s approval.

Canada and the United States are highly unlikely to go to war, of course, though the wrangling could keep maritime lawyers busy for years. As temperatures climb, officials warn, tempers may follow. “It’s a serious legal dispute,” Mr. Steinberg said. “When it is ice-free, there will be some real issues.”

Simply issue drilling permits, and Gulf oil rigs will do the rest.

By Jim Noe
The Washington Times

As news continues to break about the bankruptcy of the government-backed solar- panel manufacturer Solyndra LLC, much commentary has focused on who said what inside the ad- ministration prior to the company’s collapse. But the implosion of a company once touted as a symbol of the booming job creation that would accompany America’s energy future brings larger lessons about our country’s energy and economic needs.

Our country’s energy future hinges in large part on how we manage the gradual transition to a blended energy supply portfolio based in part on next-generation, sustainable energy sources such as solar, geothermal, wind and others that have yet to emerge. The question we need to ask ourselves as we undertake this long-term process is: What do Americans need now, and where can we find it?

Unfortunately, the administration seems inclined to duck that question, favoring poster-ready solutions like Solyndra over more pragmatic discussions about how best to use our country’s existing resources. Its reluctance is a shame, as it comes at the cost of unrealized energy production and forsaken American jobs – particularly in the Gulf of Mexico region.

How have administration energy policies – so friendly to unproven prospects like the solar-powered Solyndra – treated the proven assets we have in the Gulf of Mexico? Not quite as sunnily, to say the least. A host of new permitting requirements have been developed in the past 1 1/2 years for exploration and development of offshore resources in the Gulf. While meant to promote the safest and most environmentally friendly operations possible – goals heartily shared by industry, whose long-term viability depends on sustainable production – the process by which companies secure permits for exploration and production has become unpredictable and opaque.

While there is robust demand for drilling in the Gulf, the pace of issuing permits for new wells (5.2 per month) has slowed to a trickle not seen since energy demand nearly evaporated during the recessionary days of 2009. What this means in real-world terms is that it can take an operator three months to secure a permit for a new well – a time frame that is insufficient to satisfy demand. On top of that, the backlog of permits awaiting decisions within the Department of the Interior just reached its highest level since the Gulf spill 1 1/2 years ago.

According to the administration’s own Energy Information Administration (EIA), U.S. energy output is slated to decrease by 250,000 barrels per day per year under domestic energy production policies. EIA forecasts show Gulf production declining 14 percent both this year and next, a drop of approximately one-third of 2010 amounts by the end of 2012.

By the same token, our current energy policies have allowed a historic loss of drilling rigs to occur, jeopardizing our ability to produce our natural resources. Since 2001, 78 jack-up drilling rigs have left the Gulf, leaving 42 currently available. Thirteen rigs have left the Gulf since April 2010 alone. The departure of these high-technology, capital-intensive rigs means our country’s capacity to ramp up production likely has been curtailed for years to come.

The job losses associated with the administration’s reluctance to support offshore production are also severe. According to a study by IHS Global Insight, run by renowned energy analyst Daniel Yergin, “In 2012, the [Gulf oil and gas] industry could create 230,000 American jobs, generate more than $44 billion of U.S. [gross domestic product], contribute $12 billion in tax and royalty revenues, produce 150 million barrels of domestic oil, and reduce by $15 billion the amount the U.S. sends to foreign governments for imported oil.” The study also cites benefits outside of the Gulf, with one-third of new jobs generated in California, Florida, Illinois, Georgia and Pennsylvania.

There is one final lesson to be noted here. While the Solyndra collapse likely will end up costing the American taxpayers who helped fund the company’s expansion, production of our natural resources in the Gulf adds money to the U.S. Treasury – something you don’t see a lot these days. In 2008, the offshore industry paid $8.3 billion in royalties and $9.4 billion in bids on new leases. In 2010, the numbers fell sharply because of the spill and the drilling moratorium, with payments falling to $4 billion in royalties and just $979 million in lease bids. The outlook for 2011 revenues under the current pace of permitting is more on track with 2010 than 2008.

The future of U.S. energy supplies will no doubt hinge on developing resources that are only now emerging onto the scene. Today’s needs call for more tangible action. To boost jobs, energy supplies and U.S. Treasury revenue, the administration should prioritize improvement in the Gulf permitting regime rather than let energy policy be guided by politics.

Jim Noe is senior vice president, general counsel and chief compliance officer of Hercules Offshore Inc., the largest shallow-water drilling company in the Gulf of Mexico. He also is executive director of the Shallow Water Energy Security Coalition.

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